Business | Opinion
All major economies have stakes in avoiding a US recession
Global stock markets, including GCC and Arab bourses, suffered major losses between 12 to 17 per cent in three days, after the recent sharp fall.
- By Dr Mohammad Al Asoomi, Special to Gulf News
- Published: 01:28 January 31, 2008
Global stock markets, including GCC and Arab bourses, suffered major losses between 12 to 17 per cent in three days, after the recent sharp fall.
GCC stock markets have not seen such a sharp slide for a while, which raises questions about what exactly happened - whether the dip is related to the US mortgage crisis and the possibility of a possible economic stagnation in the US in the next few months.
What happened has more than one explanation.
The crisis in GCC stock markets was too big to be simply attributed to speculation in the US.
There are three main reasons behind the fall. The first is related to speculations about the world's largest economy, which constitutes almost one quarter of the global economy.
The second reason a psychological, which mostly affects small investors, while the third is important to speculations, which were used by big speculators who usually utilise such prospects to their advantage.
If this was merely related to the stagnation prospects in the US economy, how can we explain the fall in emerging markets?
This question is logical, when the fall in these emerging markets, whose companies have been achieving excellent results, exceeded the decline in US markets.
This means that there are psychological factors and strong speculation that led to the sharp decline in GCC and Arab markets, which strongly recovered momentum after thousands of small investors suffered major losses in view of a new wave of herd rush.
Prospects concerning a stagnation in the US are serious and must be taken into consideration, yet the age of globalisation and the interlinkages between global markets may not allow the occurrence of another global stagnation, such as the one that took place between 1929 and 1933 and was partially responsible for the Second World War.
Propping up
All countries will rush to assist the US and prevent its economy from collapsing, as this collapse will not be limited to the US, but will affect the whole world.
This explains the European and Asian intervention following the US property mortgage crisis, and the direct intervention by the European, Japanese and US central banks, to prevent the collapse of the banking and financial sector in the US.
Moreover, the European and Asian countries, including GCC states, still have many options to avoid the impact of a US slowdown. The rate cut by the US bank was only the beginning, to be followed by other effective steps.
What can investors do to maintain and develop their investments in light of the current sharp fluctuations, which are expected to continue in the next few months until the picture becomes clearer on the status of the global economy as a whole and the American economy in particular?
The first step is to ignore rumours and avoid unjustified fear, and focus on the analysis of companies and their performance, as well as adopting long-term investment.
GCC and Arab stock markets still enjoy a robust outlook, and their listed financial institutions were not involved in the mortgage crisis. Above all, GCC economies will continue to achieve high growth rates in 2008, while the profits of local companies will continue to rise due to their good performance.
This is why we must not jump to conclusions and take unnecessary measures. The US may suffer stagnation, and may avoided it if the world's leading economies put their efforts together, which is bound to happen if ground realities are considered.
The writer is a UAE economic expert.
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